Quarterly Re-Cap; Bear Market Hope

Summer ended, Autumn commenced, and the first 9 months are now past history on the annual calendar.

Financial markets were again in the doghouse for the 3^rd quarter, with stocks, bonds and Gold all lower by varying degrees. Add to that inflation’s persistently high levels and five interest rate hikes by the Federal Reserve this year (two in the third quarter), that should tell you that the headwinds are still in place for subdued stock and bond market gains.

If you let the market’s direction dictate your emotions, you’ve probably needed counseling or therapy this year. The volatility has been immense! Consider: Stock prices (Dow Jones and S&P 500) fell 19%-23% from their all-time highs set in early January.

Then from the mid-June lows; they rallied 14%-17% into mid-August; then fell again 16%-17% into late September. Many individual stocks fell much more. Wow.

Then, about the time you were going on-line to check your September month-end brokerage or retirement account balances, the market shot up like a NASA rocket +6% in just two days this past Monday and Tuesday. How the heck do you handicap all that?

So what did work this year in the stock market? Not much. The winning categories were few and far between. Of the 11 Sectors of the market into which all stocks are placed, only ENERGY made money in the first 9 months; about +35%. That’s it. For the third quarter alone, top performers were again Energy +4%, followed by Consumer Discretionary +4%, Financials -3%, and Health Care -5%. In this environment, losing less is a success.

For instance, the price of Gold and Utility stocks are down 8% each this year, while Technology and Real estate stocks are down 30% ! It takes a lot less of a gain to recover from a 8% loss than a 30% loss; a LOT less.

If you tossed your money into an index or exchange-traded fund like the Dow Jones (DIA) or S&P 500 (SPY), you lost 5% to 7% in the 3^rd quarter and are down 21-24% on your money year-to-date. Hand me the Bromo-Seltzer.  

On interest rates; they have continued higher most of 2022 with the five Fed rate hikes mentioned above. The 10-year U.S. Treasury Note’s interest yield this year shows a steady rise from 1.5% to 3.8% currently. That’s more than a double, and it’s starting to slow down our economy which is closely tied to our costs to borrow money and balance our household budgets.

On the saver’s side of the ledger, CD’s, money market funds, Treasury bills and fixed annuities are paying a LOT more. 

Here are the U.S. Treasury and CD rates as of today reported by Fidelity Investments.

These are annual rates based on the maturity of the CD/Bond. $100,000 invested in a 6 month Treasury Bill would earn $320.00 per month.

So what to make of all this gloomy news I am reporting?

Hope. Because the United States economy is the strongest and the most resilient economy in the world. This is true for our financial markets also. The ‘Bear Market*’ that stocks are in now since this past January, is the 11^th bear market since mid-1957. That’s 65 years ago.

Each time the economy recovered, and company profits and stock prices marched upward. Depending on your age now, you may not have lived through some of those earlier bear markets in ’62, ’66, ’68-70, ’73-’74, ’80-’82, and 1987. I started in this business in 1982, joining my father's investment advisory. The Dow Jones Average was 777 then.

Recent events over the last 20 years include: 2000-2002 the bursting of the Dot-Com bubble (49% loss); the 2008-2009 global financial crisis (55% loss), the 2020 Covid-19 Pandemic (a quick 33% loss), and then this year’s bear market of -24% peak to trough (so far). Each bear market unfolds differently, but they all end!

Interestingly, the Covid-19 bear market lasted just one month, and then stock prices were off to the races; doubling in the next 22 months (to Jan. 2022). If you throw out the brief Covid bear market, the average ‘bear’ lasts 14-1/2 months and is a 35% loss; that would put the end of this one near March, 2023 near Dow Jones 24,000. That forecast has lots of wiggle room folks. Don’t hold me to that please.

It's important to know market history to understand what COULD happen again.

I think it is more productive to concentrate on how much you own in stocks, bonds, gold and cash vs. trying to handicap the ups and downs of the prices. If the general direction is UP over your investing "career", then own some stock, some bonds, some Gold.

I’ll re-gigger a prior post on that and get it out to you soon on how to quantify your risks using stocks, bonds, Gold and cash.

Give me a shout-out if you have any questions on any of this.

  ~Barry

* a decline of 20% or more